Characteristics of Swap Contracts
On 30 June, a trader enters into a fixed-for-floating interest rate swap with a notional value of USD 1,000,000. The fixed rate is set to 3.3% and the floating rate is the MRR as shown in the table:
| Date | MRR |
|--------------|-------------------|
| 30 June | 3.2% |
| 30 September | 3.5% |
On 30 September, the trader _most likely_:
Incorrect.
It is possible to arrive at this answer by using the wrong interest rate in performing the necessary calculations.
Correct!
The MRR is forward looking. Hence, the payout on 30 September will be based on the MRR on 30 June. The trader pays the fixed rate and receives the floating rate for a net payment of the following.
$$\displaystyle 3.3 \% - 3.2 \% = 0.1 \%$$
Since interest rates are quoted on a nominal annual basis, the net payment made by the trader for three months is
$$\displaystyle \frac{0.1 \%}{4} = 0.025 \% $$.
On a USD 1,000,000 notional value, the trader pays the following.
$$\displaystyle 0.00025 \times 1{,}000{,}000 = 250$$
Incorrect.
The net payment involves the trader making a payment, not receiving one.
pays USD 250.
pays USD 500.
receives USD 500.
